Originally considered a legal high, mephedrone was declared illegal in 2010 and its use has since increased. Photograph: Rex Features

Current drug policies present significant risks to Britain's young people. Traditional drugs are in the hands of criminal gangs and often if a young person goes to a dealer asking for a low risk variety of cannabis, the dealer will try and persuade them to buy something "much more exciting". Criminal suppliers also have every incentive to adulterate the drugs in order to enhance the profits – cutting agents are at times seriously dangerous. Legal highs, meanwhile, are in the hands of unscrupulous scientists in China who create their concoctions in laboratories, advertise them on the web and send them over to unsuspecting young people in Britain and elsewhere.

After 40 years of a drug policy built on the assumption that we can create a "drug-free world" while drug use increased exponentially – cannabis use has increased 20-fold in 40 years – we have to accept that many young people will use drugs, whether they are legal or not. Indeed some are attracted to taking a substance because it is banned. We will never eliminate drug use. As a Downing Street strategy unit report concluded in 2003, so long as there is a lucrative market for drugs in rich countries, and large numbers of easily exploited farmers in poor countries, it will be almost impossible for us to reduce substantially the quantity of drugs produced.

The all-party parliamentary group on drug policy reform undertook an inquiry into the implications of the arrival of "legal highs" – a new substance appeared on the UK market every week in 2012. We had evidence from 31 governmental organisations; other bodies like the Association of Chief Police Officers (Acpo), regulatory bodies and individual drug scientists. We were surprised by the degree of consensus on the need for reform of drug policy; the fact that the Misuse of Drugs Act 1971 simply cannot cope with the modern polydrug culture; and the impossibility of effectively controlling the supply of "legal highs" using existing legislative instruments.

Our inquiry panel of nine peers from all the main political parties recommend three significant reforms. First, to introduce a Class D for the least harmful drugs (legal highs initially) which would be controlled through regulation. The suppliers of these Class D drugs would be responsible for showing that their produce causes only limited harms to the user (they would be much safer than alcohol or tobacco, for example). The supply would be regulated and tough conditions on age limits, packaging and labelling applied. Such a policy is being introduced inNew Zealand and should, in our view be a priority for Britain where we have twice the use of "legal highs" as the rest of Europe.

Second, decriminalisation of the possession and use of small quantities of any drug is overdue in this country. Portugal introduced such a policy more than a decade ago. Instead of spending large sums on imprisoning young people, taxpayers' money has been spent on treatment. The result has been that fewer young people use or abuse drugs in Portugal than in neighbouring countries. More are in treatment and less in prison.

Finally, we need an evidence-based classification of drugs. This can only be achieved if the Advisory Council on the Misuse of Drugs becomes an independent decision-making body. Politicians should retain responsibility for overall drugs policy but scientific assessments and decisions relating to individual drugs should be made by the scientists. The level of risk should be the only criteria determining the class of a drug.

The prime minister says the current policy is working. I wish it were. But as the use of cannabis has declined by a few percentage points over the past few years, the use of "legal highs" has soared. The position for drugs users is therefore more dangerous than it was a few years ago. ACPO and the Advisory Council on the Misuse of Drugs say that the current system is ill-equipped to deal with the modern drugs world. I think the prime minister knows this very well.

We recommend a senior crossparty working group to develop the proposals put forward by the inquiry. These policies are evidence-based and will reduce the level of drug harm in Britain.